Paulson says will work to improve housing bill

JEDDAH (Reuters) - Treasury Secretary Henry Paulson said on Friday he has some problems with the housing rescue plan under consideration in the U.S. Senate, but will work to craft a bill that President George W. Bush can sign.

Paulson told reporters on his plane to Saudi Arabia for a four-day trip to the Middle East that he backed provisions in the bill for a stronger regulator for major housing finance sources Fannie Mae and Freddie Mac, but his view of the mortgage guarantee provisions was mixed.

"Some parts of the legislation are modestly helpful and others are not helpful," Paulson said. "It's a big part of my job to work to get the strongest possible housing bill on the president's desk so he can sign it and we can get GSE reform."

The comments were Paulson's first on a proposed mortgage guarantee fund in the bill passed by a Senate committee on May 20, and suggest he will continue to press lawmakers for changes. Up until now he has only praised the portion of the bill that reforms oversight of the two government sponsored enterprises.

Paulson, who will visit Saudi Arabia, Qatar and the United Arab Emirates, will tell leaders in the region that housing remains the biggest downside risk to the U.S. economy, which is going through a "tough period" and is under pressure from high oil prices.

Despite data this week showing that first-quarter growth was slightly better than previously thought, Paulson said there was still difficulty ahead.

"My message is not changing. I'm not declaring victory. I'm going to say we're going through a tough period, that I believe growth will be relatively stronger by year end. I don't know that, but I believe it," he said.

But he also will emphasize to officials, including Saudi Arabia's King Abdullah on Saturday, that the U.S. long-term fundamentals are "bullish" and compare favorably to those of other major industrialized nations.

Saudi Arabia and other Gulf oil producers still maintain currency pegs to the dollar, whose decline, along with high oil prices, has fueled inflation. Kuwait last year abandoned its dollar peg and now pegs instead to a basket of currencies.

OPEN INVESTMENT TWO-WAY STREET

Paulson said his main message will be to emphasize the U.S. commitment to staying open to foreign investment and will urge regional leaders to do the same, particularly in the energy sector.

He said the world needs to increase the supply of traditional fossil fuels as well as alternative energy, but a lack of foreign investment in many oil producing nations in the Middle East, and others with state oil monopolies, has stalled oil production growth.

Oil "yields are going down. To me that calls for more technology and more investment. I think this region and other regions whether you're talking about Russia, Venezuela or Mexico, should open up to investment. It's in their interest and it's in the world's interest."

But he said this was not a near-term fix and should also be accompanied by market reforms governing fuel demand, such as reductions in fuel price subsidies in many countries.

Paulson acknowledged the failed deal by Dubai Ports World to acquire U.S. port operations in 2006 over objections in Congress dealt a blow to perceptions about America's receptiveness to investments from the Middle East.

But he said since then, investments from the region have increased over 400 percent in value and each one that has had a Treasury-led security review had been approved.

A number of Middle Eastern governments are looking to invest excess petro dollars through sovereign wealth funds, and Paulson said he will urge their cooperation in complying with best practices guidelines under development by the International Monetary Fund.

Such guidelines, which will aim to ensure investments are made for commercial, not political purposes and specify certain levels of market transparency, will help keep markets open, Paulson said. It will give governments who receive such investments a "new tool" to allay concerns about foreign purchases, he added.

Paulson will meet with officials in Qatar on Sunday and in the emirates of Abu Dhabi and Dubai on Monday.

(Reporting by David Lawder; Editing by Neil Stempleman)